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Reestimating the Cost of Production in a Fuzzy Technological Environment

In: Cost Analysis and Estimating

Author

Listed:
  • H. D. Vinod

    (Fordham University, Economics Dept)

  • Parantap Basu

    (Fordham University, Economics Dept)

Abstract

Most profit maximizing firms are aware that the boundary of the feasible set of technological opportunities is fuzzy. The neoclassical theory of the firm assumes that the boundary of the feasible set of technological opportunities is well-defined. We use a spheroidal neighborhood of a neoclassical profit maximizing equilibrium as a suitable approximation of a fuzzy input demand correspondence. Using trigonometric functions this spheroidal neighborhood is parameterized and a fuzzy cost function is generated. We use Nerlove’s (1963) famous electric utility data to estimate a generalized Leontief cost function, with and without inclusion of a fuzz factor. The concept of fuzz used here seems to be in accord with Popper’s (1973) notion of “plastic control” and Simon’s notion of “bounded rationality”. For concreteness we plot a fuzzy isoquant for Nerlove’s data. We also report numerical estimates of scale elasticity, marginal cost, Hessian matrix, etc.

Suggested Citation

  • H. D. Vinod & Parantap Basu, 1990. "Reestimating the Cost of Production in a Fuzzy Technological Environment," Springer Books, in: Willis R. Greer Jr. & Daniel A. Nussbaum (ed.), Cost Analysis and Estimating, pages 3-29, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4612-0995-9_1
    DOI: 10.1007/978-1-4612-0995-9_1
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